Pinterest IPO is set to take place in 2015, and is one of the eagerly awaited tech IPOs for 2015. This social scrapbooking site is a bit different from other networking sites such as Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), and LinkedIn (NYSE:LNKD) and allows its users to pin content from around the web to their Pinterest page, arrange that content in boards, and search pins of similar interest. Pinterest was founded in 2008 and has gained 70 million users by now with 40 million monthly active users.

Pinterest completed five acquisitions since 2013 that enabled the company to expand its social capabilities and improve platform monetization capabilities. In June 2014, Pinterest used these monetization capabilities to enter the online ads market with its promoted pins program. Pinterest offered selected merchants to advertise on its platform as part of a phase one implementation of the new ads platform. Phase two of the implementation will start at the beginning of 2015 when Pinterest will allow all merchants to advertise. In its new promoted pins program, Pinterest competes with tech giants like Google, Yahoo, Amazon, Facebook, and Twitter over advertising revenue.

Pinterest Growth

Pinterest is the fastest growing social platform (together with Tumblr) according to Global Web Index Q3 2014 report. As shown in Chart 1 below, Pinterest’s registered users' growth rate is higher than all other social platforms with 57% and the second-fastest growing social platform in active users with an 111% growth rate in the last six months.

The significant growth rates indicate the potential Pinterest withholds that could enable it to become a leading player in the social media market. Pinterest should monetize these impressive growth rates and increase ad sales quickly based on the recently launched ad platform. Currently, Pinterest’s revenue is based on the SkimLinks deal that monetizes links on Pinterest to other sites. According to different estimates, this deal will generate around $50 million a year for Pinterest. Even though this figure increases as traffic through the site increases as well, most of the revenues will come from the ad sales market.

As mentioned above, Pinterest is opening its ad sales platform to all merchants after a successful first phase with selected advertisers. Wedbush Securities estimates that Pinterest will generate $500 million in 2016 through the new ad platform. Assuming the SKimLinks deal continues to 2016, Pinterest should make at least $100 million from the increased traffic by that year, bringing total estimated revenues in 2016 to $600 million.

Pinterest Funding and Valuation

Pinterest raised more than $750 million in seven funding rounds from January 2010 to May 2014. As shown in Chart 2 below, Pinterest stock price and valuation increased with every funding round, with the latest Series F valuation of $5 billion taking Pinterest stock price to $17.67. Early shareholders include leading venture capital funds such as Bessemer Venture Partners, FirstMark Capital and Andreessen Horowitz, as well as leading hedge fund Valiant Capital Partners and Japanese tech firm Rakuten.

Pinterest IPO Price Estimation

The latest funding round set Pinterest valuation at $5 billion with low estimated revenues for 2014; the company has a very high P/S ratio. Other social media giants like Facebook and Twitter had a P/S ratio which was slightly higher than 11 during their IPOs, and even then both the Facebook stock and Twitter stock were considered overvalued. Facebook IPO was termed a disaster, while at the time of Twitter IPO the company was not even profitable. If Pinterest goes public in mid-2015, it will have an estimated trailing twelve months revenues of around $150 million, which reflects a not-so-compelling P/S ratio of 33 that indicates the company is overvalued.

For the Pinterest IPO to be successful, the company should price its shares at a discount to the Series F price of $17.67. A reasonable price range for the Pinterest IPO is between $35 and $45, which reflects a P/S ratio range of 13 to 17 after a 2:1 reverse split and a 50% to 60% discount.

Conclusion

The social scrapbooking site Pinterest is expected to go public next year. Pinterest has the highest growth rate in the social media market and recently launched an ad sales platform to monetize this growth and generate revenues. Currently, Pinterest generates revenues through its deal with SkimLinks to monetize links on Pinterest; however, the new ad sales platform should increase the company’s revenues infinitely compared to current levels.

As Pinterest revenue is very little at the moment, it may have to perform a reverse stock split and provide massive discounts on Pinterest share price compared to the series F price. After the reverse split and price discount, Pinterest will present a P/S of 13 to 17 which is still a high range, reflecting a very high valuation for the company.

As Pinterest launched its advertising platform recently, that is expected to drive most of the company’s revenues in the future. If Pinterest IPO is pushed towards the end of 2015 or the beginning of 2016, it will be able to include the ad sales revenues in its valuation and improve its P/S ratio without reverse splitting or massive discounting its shares. If Pinterest decides to go public in 2015 and release its official S-1, I will revisit my analysis.

Disclosure: Information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their own due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro Financial Consulting and Analysis are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

Facebook Stock Articles & Video

Facebook has been testing the introduction of a dedicated video tab inside its mobile app among a select group of users over the past year. Facebook overtook YouTube for Christmas social video campaigns of 2016 in the UK. Can Facebook make a big dent into digital video advertising industry leader YouTube's market share going forward.

The Snapchat IPO, due in 2017, is expected to be the biggest tech IPO after Alibaba's. Reports suggest that Snapchat is eyeing stratospheric valuations, at 25-35 times 2017 sales. Even by the most conservative estimates, the IPO could unlock huge upside for FB stock.

Facebook's 'overstated metrics' won't drive away advertisers, but ad-prices could be impacted. You might not have realized it, but in some cases, the 'overstatement' is as actually high as 122%. Don't sell FB stock. However, you might want to tone down your expectations.

Facebook is attempting again to enter the seemingly attractive Chinese market. Facebook is reportedly developing tools which could allow for a limited censorship, something it had refused to do in past. Should Facebook pursue its Chinese dream at the cost of its stated core values?

Facebook got hit with a wave of negative news, but most of it was over-hyped. The stock will soon recover, as much of the speculation is unsubstantiated/unwarranted. Core fundamentals remain intact, as ad pricing and inventory were largely unaffected.

The views expressed in the article are of individual authors and are not necessarily supported by Amigobulls.We do not hold any stake in the aforesaid stocks. Please read our detailed disclaimer.

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